Banks gouge case key test for class actions

Adele Ferguson

The move by plaintiff law firm Maurice Blackburn to file an open class action against some of the country’s biggest banks comes as the Productivity Commission is set to release a controversial report into the legal system and the funding of class actions.

Industry speculation is that the Productivity Commission’s 15-month inquiry will fall on the side of competition by allowing lawyers to charge a percentage of the winnings on certain classifications of legal actions. But it will be based on the proviso they also take on the risks through an adverse cost cover if they lose.

Over six years, banks including ANZ, CBA, Citibank, Westpac and NAB raised $6 billion from five types of fees, including late payments on credit cards. Photo: Bloomberg

The brutal reality is in litigation today a claim under $1 million is generally too expensive to litigate, particularly if it is against a big corporate determined to take it all the way to the High Court if necessary.

Cases such as the class action against the banks and fees would never have seen the light of day if it wasn’t for a litigation funder, in this case Bentham IMF.

This is a case where the banks had systematically been gouging customers over the years, charging late fees that exceeded the true cost by up to 7000 per cent.

Over six years, banks including ANZ, CBA, Citibank, Westpac and NAB raised $6 billion from five types of fees, including late payments on credit cards. However, the gouging was small amounts of money to most victims.

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If you have hundreds of people who have the same claim but can’t afford to take action, it leaves huge swathes of the population unable to take action to protect themselves.

In crude terms, class actions give people who would otherwise fall through the cracks a chance to have their day in court. If they are funded by a litigation funder on a “no-win, no-fee” basis, it means anyone who signs up for the class action will not have to pay a fee if it is lost.

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Debate on class actions and litigation funders is fierce. On one side there are those who see class actions as an industry of “private bounty hunters'' who are using the legal system for profit. They believe the legal system should be left to the regulators and not "private bounty hunters".

Others see it otherwise. They see it as a way to get some financial compensation for being duped, particularly when the corporate regulator, ASIC, either sits back or does nothing.

Indeed a high-profile barrister has argued that litigationfunder Bentham IMF has become the de facto public corporate enforcement arm - done with about 20 staff, compared to ASIC’s estimated more than 1500. ''IMF does not do enforceable undertakings in back rooms, nor take no prisoners. And they win,'' he says.

While it isn't just about getting financial compensation, the rise of class actions has focused attention on the principles of corporate governance and the means of recovering losses that arise when companies ignore those principles.

It has prompted some to raise the question whether it should be left to the regulators to do the punishing. Should a handful of shareholders be allowed to take action, given it gives one set of shareholders preference over another set, which effectively means shareholders are suing themselves?

Some would argue a shareholder class action has the potential to sink a company, unsettle a share price, devalue a business, or act as a poison pill against a white-knight rescue.

Colleague Ben Butler recently investigated who wins out of litigation funding: businesses, investors or just lawyers? Using the Prime Trust legal action as an example he found that it allowed the action to get to court and provide compensation to victims, something they would otherwise have missed out on.

But he illustrates how it can go horribly wrong, something the Productivity Commission is expected to address by recommending a beefing-up of the regulation of litigation funders by imposing a licensing procedure for funders.

The Productivity Commission is likely to recommend following in the footsteps of the UK, which 18 months ago adopted the contingency fees model, which effectively allows lawyers to become litigation funders.

Contrary to popular belief it didn’t have the surge in class actions that was expected because of the risk they have to take in terms of taking a hit on the costs if they lose the case.

But a glance at the number of companies that have felt the scourge of class actions over the past few years is impressive. Centro, Aristocrat, Leighton Holdings and the Commonwealth Bank are just a few. Indeed, even ASIC argues they have a role to play.